Isaac Carr’s Recipe for an Entity: Part III

What does it even mean to start a business? How do I do it right? Should I be a sole proprietor, an LLC, a corporation? We’re going to talk about 4 types of entities:

Sole proprietorships and General partnerships

Limited Liability Companies (or LLCs)

Corporations

State primarily covers limiting your liability. And the federal (specifically the IRS) primarily covers taxes. And common sense covers your assets among other things.

For the third part of this blog, we are going to talk about Corporations.

Corporations (both S-corps and C-corps)

Corporations are another way for you to have limited liability as a business. However, these entities were created long before LLCs, and they have many more formalities. The owners are called shareholders, who elect a board of directors to direct the company, who then appoint officers to run the day to day decisions of the company. There are bylaws and shareholder agreements and corporate resolutions.But all of these are required to respect the mystical ‘corporate veil’ that protects you from personal liability.

The default taxation of a corporation is double taxed, once when the corporation receives the money and second time when that money is distributed to the shareholders.However, you can elect to be taxed under subchapter S of chapter 26 of the United States Code. Thus, the term S-Corp (double taxation is found under subchapter C for c-corps). This means pass-through taxation. Pass-through means that it is just taxed once, similar to partnerships (because it passes through your business straight to you). However, there are techniques to avoid some of the self-employment tax through your S-Corp. But not all businesses are right for S-corp status. Cash-flow, pass-through taxation, and limited liability all must be considered.

Finally, let say that you want to be a non-profit because you want to help people or animals or the environment. Well that is a special type of corporation.After you have filed with the state of Indiana for your nonprofit corporation, you have limited liability. However, you do not yet have a tax-exempt status under section 501(c)(3) of Chapter 26 of the United States Code. To become a tax-exempt entity, where the company does not have to pay taxes on the money, you must ask the IRS through a lengthy application process.You must have a charitable purpose to receive this special tax-exempt status.